This an article repost.
A Supreme Court ruling could hurt PLDT—and drive away foreign investors
Does the term “capital” in the Constitution refer only to voting shares of stock of a Philippine company or to all of the company’s outstanding shares? It’s a 75-year-old question that the Supreme Court resolved in June in a ruling on a case involving the Philippine Long Distance Telephone Co. (PLDT). But the resolution came as a disgruntling ring tone for the telecommunication giant and for foreign investors as a signal that may be it’s time to ring off.
The Supreme Court ruled in June that “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, whether common or voting preferred shares, and not to total outstanding shares of stock. These shares entitled to vote should be 60 percent of a corporation’s total outstanding shares. Only Filipinos may own voting shares and only they, by voting their shares, may decide who should run the company, an interpretation reinforced by the Foreign Investment Act of 1991 by requiring Filipino ownership of at least 60 percent of full-beneficial shares of corporations.
“Mere legal title is insufficient to meet the 60 percent Filipino-owned ‘capital’ required in the Constitution,” the court said. Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60 percent of the voting rights, is required. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate.” Short of this requirement, the court said, the corporation is foreign.
The court also ordered the Securities and Exchange Commission to review the PLDT’s ownership to determine whether the telecommunication company complies with the constitutional limit on foreign equity. The court directed the SEC to apply the definition of “capital” in the ruling to the PLDT review.
The PLDT is appealing the ruling, arguing in its July 15 filing that “capital” in the Constitution refers not only to voting shares but to the total outstanding shares of stock of a corporation. Note, PLDT chief Manuel Pangilinan points out in the appeal, that the framers did not qualify the term “capital.” That should be read as referring to shares of all kinds, but, Pangilinan says, the court has misread the provision, missing out the framers’ rejection of the qualified terms “voting capital” and “controlling interest,” as they wanted to refer to all types of shares.
Prior to the court’s ruling, the SEC and the Office of the Government Counsel defined “capital” as all of a corporation’s outstanding shares. Pangilinan has been saying that if the PLDT’s preferred (nonvoting) shares are included in the computation, the company would be 80 percent Filipino. But if only common (voting) shares are counted, the company would be 64 percent foreign.
That cannot be. Foreign investors, who have no say on who should run the PLDT, would suddenly be the company’s majority owners. And their ownership of the company would be illegal. They should cash out, and the Filipino managers of the company should be prosecuted for violating Philippine investment laws.
Alarmed by the implications of the ruling, the Philippine Stock Exchange has brought a separate motion for reconsideration, arguing that the decision would cost the economy more than P630 billion in foreign investments in stocks listed on the local bourse. If all those foreign investors would be forced out as a result of the court’s redefinition of “capital,” the listed stocks would lose 9 percent of their fair market value.
A judicially forced capital flight? Wow! This is a disaster in the making. Malacañang is worried about the repercussions the ruling could have on President Aquino’s foreign-investment program. It will definitely make the Philippines even more unattractive to foreign investors.
Foreign investors, too, are worried, though not yet considering pulling out. The European Chamber of Commerce says the problem the ruling has created is not irremediable but it certainly has added to the uncertainties foreign investors face in the Philippines. The remedy depends on how well the appellants argue their cases.
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By: Guiller de Guzman
Source: Philippines Free Press, July 30, 2011
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